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Get to Know a Growth Stock: NetSuite

What can growth do for you? Read on.

When it comes to investing, the most important truth is that you'll make mistakes. Big mistakes, little mistakes, even catastrophic mistakes will plague us all.

Growth investors accept this truth because, as students of history, they know that one big winner can erase a lifetime of investing mistakes. You can be wrong 60% of the time and still crush the market.

Get to know a growerWhat cheapskates and traders will tell you -- rightly -- is that sustainable growth isn't easy to find. But "not easy" isn't the same as "impossible." In this column, we'll borrow from the market-beating methods found in David Gardner's Motley Fool Rule Breakers service and the collective Foolishness of our 115,000-strong Motley Fool CAPS community.

We're looking for:

Existing growth. Winners tend to keep on winning. At Rule Breakers, we seek to invest in firms that have demonstrated high growth.

Excellent margins. Pricing power is an indicator of sustainable advantage. We want to be early investors in sustainable growth stories.

A reasonable price. The PEG ratio isn't perfect. But, on balance, it's a good idea to buy high growers at a discount to their projected growth rate.

A big problem, solved. We're like venture capitalists in that we believe that massive economic value is unleashed when firms elegantly address big, expensive problems. Admittedly, this is a subjective criterion. But a history of outsized returns by expert VCs such as Sequoia Capital, Kleiner Perkins Caulfield & Byers, and Benchmark Capital suggest it's also a necessary one.

Meet NetSuiteFirst up for our four-filter test is NetSuite(NYSE:N), an on-demand software provider that competes with salesforce.com(NYSE:CRM) and which beat Oracle(NASDAQ:ORCL) in creating software for Apple's (NASDAQ:AAPL) iPhone. Last week, it announced support for the new Chrome browser. Now, let's have a look at the numbers.

Bull or bear?Good revenue growth and high projected earnings growth, check. The PEG ratio, however, is nowhere to be found. For the size of the problem and the attendant opportunity, let's turn to commentary from the CAPS community, beginning with the bull case.

"Like Oracle, I can vouch for the technical viability of this NetSuites products. It's very difficult for mid to large size companies to run custom software that can handle their entire business," wrote CAPS All-Star jkipling in January. "NetSuite is in a good position to solve this real world problem for a lot of mid to large sized companies. SAP is also a competitor, I like them too, but NetSuite is more sexy right now."

"Baby of Larry Ellison. Partnered with ADP to sell directly to their clients. Great business to offer an affordable product to small and mid-market companies who can't afford the likes of major ERP and integrated client management systems," wrote top stock picker Shupe47 in March.

And the bears? "I have used Netsuite's CRM system. It's not the most impressive. Their infrastructure and network bandwidth were also not optimum. The CRM market is quite crowded now. Hence, it's going to be disappointment in the long term," according to zcap, another CAPS All-Star whose take appeared in January.

Zaegs, who first gave NetSuite the thumbs-down in December, adds, "I've seen this software in action and it is just ok. It does have a lot of promise and it's fairly impressive what they've been able to do, but like most new software companies, they still have a ton of hurdles to clear."

Sex versus substance, in other words.

I, too, like cloud computing as a platform for business software but salesforce.com has been the dominant performer in this market. Can NetSuite differentiate itself well enough to produce the returns investors expect? Add your voice to the debate by signing up for CAPS today. It's 100% free to participate.

Fool contributor Tim Beyers, who is ranked 18,668 out of more than 115,000 participants in CAPS, also writes for Motley Fool Rule Breakers. Here's how to try this market-beating service free for 30 days. Get access to all of Tim's Foolish writings here.

Author

Tim Beyers first began writing for the Fool in 2003. Today, he's an analyst for Motley Fool Rule Breakers and Motley Fool Supernova. At Fool.com, he covers disruptive ideas in technology and entertainment. Find him online at timbeyers.me or send email to tbeyers@foolcontractors.com. For more insights, follow Tim on Twitter.